It is, of course, known that real estate assets may be owned or otherwise controlled in a variety of ways. Generally, a piece of real estate, or other type of real estate asset, may be leased or owned by an entity, such as a corporate or governmental entity. The particular financing structure used by the entity depends on a plurality of factors, including, for example, the entity's particular financial situation and how the real estate asset is to be utilized by the individual or entity. For example, an individual may decide that a real estate asset should be leased rather than owned after examining the costs and the benefits of leasing the property as compared to owning it.
The decision of how to control a real estate asset may get much more difficult and complicated when many of the various financing structures are analyzed and compared for a particular real estate asset at the same time. For example, there are a variety of ways that a real estate asset may be owned by an individual or an entity. An entity may, for example, own a real estate asset using corporate funds, may own with debt, may own via a real estate investment trust (REIT), or may own the property with a partnership or a joint venture with another individual or entity. Likewise, there are a variety of ways that an individual or an entity may lease a real estate asset. For example, an individual or entity may utilize a short-term lease, a long-term lease, a credit sale and leaseback, a tax motivated leveraged lease or a synthetic lease. Each financing structure may have a plurality of costs and benefits that may be difficult to analyze. Further, a determination of which financing structure is best for an entity may not be readily apparent unless and until the financing structures are compared against each other.
Of course, real estate assets are major balance sheet assets for entities, in the sense that large amounts of capital are typically devoted to the ownership or control of the real estate asset. Each particular financing structure that may be used to control a real estate asset has a variety of costs and benefits associated therewith, making financing structures particularly difficult to analyze and evaluate and the optimal control structure difficult to determine.
However, despite how relatively important real estate assets are to an entity, the decision as to the financing structure that is best suited for the particular entity has traditionally been an independent event, driven more by market factors than by a true and detailed analysis of how the real estate asset may benefit or otherwise impact the entity. And even market factors are typically analyzed improperly or unrealistically.
The decision of how to structure a procurement of a real estate asset has been approached inconsistently by entities. In fact, many companies do not have a systematic, consistent and disciplined approach to making financing decisions related to the control of real estate assets. For example, within a particular company, discounting methods vary within the company and costs of debt assumptions are inconsistent. In addition, there typically is no standard timeframe for evaluating a project; various individuals may use 5-, 10- or 15-year timeframes. Still further, foreign exchange rate assumptions typically vary as well.
Companies further make unrealistic residual or market value assumptions. For example, assumptions for determining future residual values can be unrealistic or unsupported. In addition, sensitivity analysis of key financial drivers typically is not considered. Further, current market valuations for sale/leaseback analyses can often be overly optimistic and can sometimes hide funding in the evaluation of the purchase price.
In addition, many important criteria are often ignored when procuring real estate assets, such as, for example, occupancy requirements, flexibility, and broader corporate metrics. For example, EPS, ROA, and other key corporate ratios are often ignored. In addition, there may typically be a short-term focus on profitability at the expense of long-term strategic planning. Still further, there may be little understanding of, or sensitivity to, potential balance sheet implications of procuring a real estate asset.
Further, many non-financial elements are typically not considered or are severely under-weighted by individuals or entities. For example, corporate entities may enter into long-term leases without having exit strategies, which affects the value of the real estate asset to the corporate entity. Although a long-term lease can lower short-term impact on the operating budget, there may be long-term negative effects that are not considered. Further, there may be no common definition within a corporate entity of “core” versus “non-core” assets.
Still further, many entities are composed of a plurality of individuals or sub-entities that may have conflicting agendas about the particular real estate asset. For example, an entity, such as a corporation, may have a plurality of management teams that may have to submit approval to an individual or group chosen or assigned to procure the real estate asset. There may be a real estate management team, a treasury team and/or a senior management team, for example, that all may have conflicting needs or desires. Moreover, there may be external groups outside that may have to be reconciled such as, for example, shareholders, stock analysts and credit rating agencies.
In addition, many companies may be in a reactive mode, especially when the economy is in a down-cycle, and consequently do not have the time nor the internal resources or procedures to analyze and evaluate the various financing structures for procuring a real estate asset.
Further, there is generally a lack of understanding among entities as to what the various financing structures for controlling a real estate asset are and how the various structures for the procurement of a real estate asset can be used to influence various performance metrics that may be tracked in a corporation or other type of entity. In addition, new financing methodologies appear frequently, but are typically not well understood by pertinent decision-makers. For example, tax incentives that may be associated with the sale or leaseback of a real estate asset are often ignored. Moreover, individuals typically focus on local tax issues without considering, or understanding, how global tax issues may be influenced. Moreover, there may be inadequate training of key personnel that may contribute to a lack of understanding of the various financing structures.
In addition, many real estate assets are typically procured without any real global ownership of the analytical process. Decisions are often driven by local considerations and evaluation criteria, instead of recognizing the global and expansive nature of a large corporation. Typically, analysis is done by an individual or a small group of individuals instead of by various individuals in a corporation that may represent many differing points of view. Therefore, many individuals within a corporation do not feel as if they are part of the decision-making process.
Given the relative importance of real estate assets to an entity's bottom line, a system and a method are needed that will overcome the deficiencies as noted above. More specifically, a system and a method are needed that will provide a strategic and consistent approach to real estate asset procurement. Moreover, a system and a method are needed that will integrate real estate financing decision-making with non-financial criteria.